While the oral argument before the United States Supreme Court in Sutter today was ostensibly about whether to affirm an arbitrator’s decision that the parties’ contract authorized class arbitration, the decision really turns on how the Court will review all arbitration decisions.  (Transcript here.)  Multiple Justices expressed an unwillingness to create a special standard for reviewing arbitrator decisions involving class arbitration.  (Info on the underlying case here.)

Appellant’s counsel tried valiantly to express some standard of review that fit within the Court’s past jurisprudence, but also allowed for vacatur of this particular result.  In response to questions like “how wrong does an arbitrator’s decision have to be to become an issue of law?” (from Justice Sotomayor), counsel advocated that Stolt-Nielsen and Concepcion established a “presumption” that there is no consent to class arbitration without a “very clear statement of a meeting of the parties’ minds.”  However, Justice Kagan quickly noted that the Court had never suggested such a presumption in either of those cases.  Appellant’s counsel later advocated for a slightly different formulation: a reviewing court may vacate the arbitrator’s decision to allow class  arbitration if the contractual language “leaves no room for a conclusion that the parties agreed to” arbitrate on a classwide basis.  Justice Kennedy, who often casts a deciding vote in close cases,  expressed skepticism about whether the Court’s repeated and highly deferential standard of review for decisions by arbitrators allowed any kind of inquiry into the merits of the arbitrator’s contractual analysis.

Respondent’s counsel, of course, emphasized the very limited grounds for vacating an arbitration award.  He noted that Appellant argues the arbitrator “exceeded his power,” but because Appellant consented to giving the arbitrator authority to determine whether the arbitration could proceed as a class, the only way the arbitrator could have exceeded his power was by basing his award on something other than an interpretation of the contract.  This led to a series of amusing hypotheticals in which Justice Breyer asked Respondent’s counsel to assume that an arbitrator made her decision based on consulting a “magic 8-ball” (Justice Scalia pretended not to know the reference) and then asked whether that would constitute “manifest disregard” of the law or otherwise serve as grounds for vacating the award.  Justice Breyer’s questions hint that the Court may give “manifest disregard of the law” new life as a separate basis for vacating arbitration awards, and that the Court is looking for a backstop beyond just the four bases in the FAA for parties to rely on if arbitrators get the law or facts really, really wrong.

Curiously, from a Court that has vigorously enforced arbitration agreements for all types of cases, the Justices appeared skeptical of arbitrators’ capability to handle class actions, and questioned whether arbitrators were wrongly incentivized.  Justices asked how the arbitrator was compensated in this case, whether he was experienced, how many class actions were handled in arbitration (neither side could answer, since that information is not public), and whether an arbitrator would be incentivized by his own fees to create a class action after seeing a case like Sutter drag on for eleven years.  To that, Respondent’s counsel gave a good soundbite: “if we trust arbitrators to handle such important issues as civil rights issues and other very important matters [], we have to expect that they will follow the precepts of this Court and the FAA as to what constitutes grounds for class arbitration.”


The Supreme Court heard arguments in AmEx III today, the case that presents the question whether an arbitration agreement precluding class actions can be invalid if it makes it impossible for plaintiffs to vindicate federal statutory rights (in this case, because individual antitrust cases would be prohibitively expensive).  The full transcript is available here.

After a first read of the transcripts, here is what grabbed my attention:

  • • Appellant’s primary arguments were that the Second Circuit’s opinion in AmEx is contrary to Concepcion, and that affirming it would create an enforcement nightmare for district courts.  (“I don’t think we can expand Mitsubishi into a free-floating inquiry for district courts into the costs and benefits of each case.”)
  • • Appellant’s counsel (taking the pro-arbitration position here) was immediately asked a series of questions by Justice Ginsburg about the high costs of pursuing antitrust claims, and whether those could be shared among individual plaintiffs.  After the fourth question, the attorney responded pointedly “there is no guarantee in the law that every claim has a procedural path to its effective vindication.”
  • • Justice Kagan then asked a series of hypothetical questions of the Appellant’s counsel, centered on whether Appellant’s position is that under substantive federal law a valid arbitration agreement can explicitly prohibit someone from presenting economic evidence in arbitration.  When the Appellant took the position that federal law would allow that (although state law may declare it unconscionable), Justice Kagan was incredulous: “you’re going to read Mitsubishi and Randolph in such a way that it allows an arbitration clause to 100 percent effectively absolutely frustrate your ability to bring a Sherman Act suit”?
  • • Justices Kennedy and Breyer suggested that maybe the cost-effectiveness problem could be solved by having antitrust experts sitting as arbitrators, thereby reducing the need for the parties to have their own experts.  Kennedy also asked: “why do you need a $300,000 [expert] report?”  To which Respondent’s counsel noted that American Express had not made any showing in the district court that a less expensive alternative was available.
  • • Justices Kagan and Alito asked questions about whether the plaintiffs had been coerced into the arbitration agreements at issue, which the Appellant said is not an issue properly before the Court.
  • • Justice Scalia repeatedly asked the lawyers to consider what would have happened before Rule 23 and without an arbitration clause, noting that in the normal litigation context, parties do not bring small value claims.  “I don’t see how a Federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a Federal suit. That happened for years before there was such a thing as class action in Federal courts. Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated.” (Scalia even said it earlier, and fancier, in Latin: “De minimis non curate lex.”)
  • • The Respondent’s counsel responded to Scalia by saying “With respect, Justice Scalia, you don’t have to make that comparison [costs to arbitrate versus to litigate] part of the test, because the cases that can’t be vindicated in either place won’t show up at the courthouse door. So once you show up at the courthouse door, you’ve got a plaintiff’s lawyer. They may be crazy, but you have a plaintiff’s lawyer that thinks ‘I can do this in the litigation system. . . . the only thing that’s precluding me from doing it is this arbitration agreement’ — so this arbitration agreement is not operating as a real arbitration agreement, it’s operating as a de facto as-applied exculpatory clause.”
  • • Justice Roberts and others suggested it would be possible for multiple plaintiffs, with individual arbitrations, to pool their resources and hire a joint expert to provide a report.
  • • Justice Breyer expressed concern about embroiling the district courts in assessing whether a federal claim could be effectively pursued in arbitration, and about incentivizing plaintiffs to dream up expensive claims to avoid arbitration agreements.
  • • There was also significant discussion of whether the Appellant had changed its theory of the case– asking for cert on one question, but largely arguing something else.  Justice Kagan suggested that “the premise on which this case was presented to us was not quite right.”

After reading this transcript, I sense that the Justices are frustrated with having to decide this important rule of law on this particular set of facts.  They may remand for further consideration (seriously?  AmEx IV?), or say cert was improvidently granted.  Or they may affirm, but strike a compromise position in their reasoning.

A recent decision from a federal district court in Tennessee raises a discrepancy in how the courts treat arbitration agreements that hinder a plaintiff’s state law and federal law claims.  Cases under the FAA state that arbitration agreements cannot be enforced if enforcement means plaintiffs will not be able to effectively vindicate their federal statutory rights (as the DOJ argued recently). But what happens if plaintiffs cannot effective vindicate their rights under state statutes in arbitration?  That is the situation that the court addressed in Dean v. Draughons Junior College, Inc., __ F. Supp. 2d __, 2013 WL 173249 (M.D. Tenn. 2013).

In Dean, a class of students at affiliated junior colleges alleged the colleges violated state statutes by making false representations about their record of placing students in jobs.  The colleges moved to compel arbitration, based on an arbitration agreement with all of the students that included a delegation clause (authorizing the arbitrator to determine even the validity of the arbitration agreement).  The class of students argued that the delegation clause itself was unenforceable, because it was prohibitively expensive for the students to arbitrate the validity of the arbitration agreement.  (There was no class action waiver.)

The court in Dean concluded that Kentucky state law, which governed the dispute, recognized a cost-prohibitiveness defense to arbitration, and it also concluded that the plaintiffs could not pay the costs to arbitrate arbitrability.  (This is the only time I have seen a successful challenge to the delegation clause itself, pursuant to Rent-A-Center.)  However, it then concluded that Kentucky’s case law  — that precluded enforcement of arbitration agreements if those agreements hinder enforcement of state statutes — was preempted under Concepcion, because the doctrine was specific to arbitration agreements.  The court summarized that “although Rent-a-Center indicated that federal district courts could entertain state law challenges to the enforcement of a delegation clause based on [cost], this court construes Concepcion … as precluding the assertion of a Kentucky cost-prohibitiveness defense to the Delegation Clause here.”  Clearly frustrated, the court granted the defendants’ motion to compel arbitration, but noted that “this result strikes the court as manifestly unjust and, perhaps, deserving of legislative attention.”

Not only is this decision interesting because federal judges do not usually say that the Supreme Court’s case law is manifestly unjust, but because it raises a parallel issue to the one before the Supreme Court right now in AmExIII    In AmEx, the Court will (I assume) decide whether federal law will allow plaintiffs to challenge arbitration agreements that make it economically unfeasible to pursue their federal statutory claims.  If that “effective vindication” rule survives for federal statutes, why shouldn’t states be allowed to enforce similar rules for their own statutes?  On the other hand, if SCOTUS strikes down the “effective vindication” rule, then state and federal laws are treated equally.

On January 29, the U.S. Dept. of Justice filed an amicus brief supporting respondents in AmEx III, arguing that to enforce the class arbitration waiver would be to create a large loophole for important federal laws.  The Solicitor General has also asked to argue at the hearing on February 27.  To my knowledge, DOJ has never previously weighed in on an arbitration case before the U.S. Supreme Court.

The issue in AmEx is whether American Express can enforce its arbitration agreement, which precludes any class or consolidated actions, against a class of plaintiffs who allege antitrust violations.  The Second Circuit has held, on remand and on reconsideration, that American Express cannot enforce that arbitration agreement.  The court held that the plaintiffs proved it was not economically feasible to pursue their cases on an individual basis and therefore precluding a class action meant precluding the enforcement of their antitrust rights, which is sufficient to invalidate the arbitration agreement under Green Tree Financial Corp.  v. Randolph, 531 U.S. 79 (2000).  

A few months ago, I was concerned that the only amici weighing in on this case seemed to be on the side of rigid enforcement of class action waivers.  I spoke too soon.  A host of knights in shining armor have appeared to argue on behalf of these antitrust plaintiffs, including 22 state attorneys general, Public Citizen, a group of professors, and the Solicitor General himself.  (Maybe this should not be surprising, after other federal agencies have taken stands against class waivers in arbitration agreements.  Also, maybe I am reading too much Game of Thrones…)

The brief of the Department of Justice works hard to strengthen the precedent supporting an affirmance of AmEx.  It argues that for decades the Supreme Court has refused to enforce arbitration agreements that prevent any “effective vindication” of federal statutory claims (citing Mitsubishi, Gilmer, Vimar Seguros y Reaseguros, and 14 Penn Plaza, as well as Randolph).  It argues that affirming the “effective-vindication rule” would not undermine the FAA,  that the standard is not unworkable for courts to apply, and that Concepcion does not dictate a reversal.

What I found most compelling in the Government’s brief, however, was its focus on how the Supreme Court’s decision will influence the drafting of arbitration agreements in the years to come:

“the effective-vindication principle, it should be emphasized, is not simply a sound rule of decision for the rare case in which a federal statutory claim cannot feasibly be pursued through the arbitration procedure specified in the parties’ agreement. . . . the [rule] creates a salutary incentive for companies that prefer arbitration to ensure that such cases remain rare, by adopting arbitration procedures that can feasibly be invoked even for small-value claims.”  In contrast, “under petitioners’ approach… companies could use a combination of class-action and joinder prohibitions, confidentiality requirements, and other procedural restrictions to increase the likelihood that a plaintiff’s cost of arbitration will exceed its projected recovery …That would deprive a range of federal statutes of their intended deterrent and compensatory effect, without promoting the actual use of arbitration as an alternative means of dispute resolution.”

Will that be enough to sway one of the usual conservative block of justices that votes for rigid enforcement of the FAA?  (Justice Sotomayor is recused from this case, so only eight justices will consider it.)  I hope so.

The Ninth Circuit ruled this week that a class of car owners could pursue their court claims against the manufacturer, Toyota, for product defects and false advertising, despite the existence of an arbitration agreement in each of the owners’ purchase agreements with the car dealerships.  The court held that Toyota had not proven either of the types of equitable estoppel that would allow it, as a non-signatory to the purchase agreements, to enforce the agreements’ arbitration clause.   Kramer v. Toyota Motor Corp., __ F.3d __, 2013 WL 357792 (9th Cir. Jan. 30, 2013).  (How could I resist posting about an arbitration case with “Kramer’ in the caption?!)

The plaintiffs’ claims related to defects in the antilock brake systems of 2010 models of the Toyota Prius and Lexus HS 250h.  Plaintiffs asserted multiple claims against Toyota, including violation of California laws prohibiting unfair competition and false advertising, breach of the implied warranty of merchantability, and breach of contract.  After “vigorously litigating the action” for almost two years, Toyota moved to compel arbitration a few months after SCOTUS issued ConcepcionToyota pointed to language in the purchase agreements allowing arbitration, delegating scope issues to the arbitrator, and waiving any right to arbitrate as a class.  The district court denied the motion to compel arbitration.

The Ninth Circuit affirmed.  In a very thorough opinion, the court found Toyota had no right to enforce the arbitration agreement, and therefore it was not necessary to consider whether Toyota had waived that right by participating in litigation.

The first legal issue the court addressed was whether to enforce the delegation clause in the arbitration agreement.  The purchase agreement stated that the parties would arbitrate “any claim or dispute about the interpretation and scope of this Arbitration Clause,” and Toyota argued that whether a non-signatory could compel arbitration was essentially a question of scope.  The court concluded that there was not the necessary “clear and unmistakable evidence” that the plaintiffs agreed to arbitrate arbitrability with Toyota.  (I take issue with this part of the opinion because it seems premised on the later conclusion that Toyota has no right to arbitrate under the agreement.  It would be simpler to rely on the default proposition, stated most recently in Granite Rock, that it is always for the court to determine whether an arbitration agreement exists at all.)

Having concluded that the court could properly address the merits of the dispute, the Ninth Circuit methodically destroyed Toyota’s arguments that it was entitled to compel arbitration under California’s equitable estoppel doctrine.   There are only two ways for a non-signatory to enforce an arbitration clause in California: 1) when the signatory’s claims rely on terms of the agreement containing the arbitration clause; and 2) when the signatory alleges concerted misconduct by the non-signatory and another signatory that is “intimately connected” with the agreement containing the arbitration clause.

The court concluded Toyota had not shown the first type of equitable estoppel, because the plaintiffs’ claims against Toyota were not sufficiently intertwined with their purchase agreements.  The court noted that the complaint never even referenced the purchase agreements.  With respect to the plaintiffs’ implied warranty claim, the purchase agreements clarified the dealer was not a party to the manufacturer’s warranty.  Therefore, the warranty claim against Toyota was not intertwined with the purchase agreements.  Similarly, though plaintiffs asserted breach of contract against Toyota, it was based on their alleged status as third-party beneficiaries to the contracts between the dealers and Toyota, and therefore did not relate to their purchase agreements.  The court also clarified that plaintiffs’ requested remedies were immaterial to an equitable estoppel analysis, only their claims were relevant.  (Toyota had argued that because the plaintiffs sought revocation of the purchase, which implicates the purchase agreements, they should be equitably estopped from avoiding arbitration.)

Finally, the court concluded Toyota had not show the second type of equitable estoppel.  It found the plaintiffs did not allege collusion between the dealerships and Toyota, and even if they had, that collusion was not connected to the purchase agreements at all, which is necessary for application of equitable estoppel.

This opinion is interesting because it provides another analysis of the nexus required between claims and an arbitration agreement to prove equitable estoppel.  It is also interesting because it shows what kind of fallout results from a major change in the law.  Before the 2011 decision in Concepcion, many states refused to enforce waivers of class arbitration.  So, frequently counsel for defendants like Toyota did not try to enforce that class waiver (by virtue of enforcing the arbitration agreement).  But, everything changed with first the Stolt-Nielsen and then the Concepcion decisions, and multiple defendants have made very tardy arguments in favor of arbitration (individual arbitration, in particular) to take advantage of those changes in the law.  Some have failed, like Toyota in this case, this defendant in the 11th Cir, and the defendant in Gutierrez v. Wells Fargo Bank, __ F.3d __, 2012 WL 6684748 (9th Cir. Dec. 26, 2012).  On the other hand, some have been successful, like this defendant in the 4th Cir. , and the defendant in Chassen v. Fidelity Nat’l Fin., Inc., 2013 WL 265228 (D.N.J. Jan. 23, 2013).  That mix of recent decisions show it is probably worth it for defendants to move to belatedly enforce arbitration agreements prohibiting class actions.  It also shows how important it is to have consistent case law that parties can rely on in making strategic decisions about litigation.

One year ago, the NLRB ruled in D.R. Horton, Inc. that it is a violation of federal labor law for employers to require their employees to sign arbitration agreements waiving class actions, and that any arbitration agreements waiving class arbitration would be void.  This week, the Eighth Circuit became the first federal circuit court to refuse to enforce the NLRB’s ruling.

In Owen v. Bristol Care, Inc., __ F.3d __, 2013 WL 57874 (8th Cir. Jan. 7, 2013), an employee sued her employer for violations of the Fair Labor Standards Act (FLSA), and sought to proceed as a class action.  The employer moved to compel arbitration, based on the employee’s arbitration agreement which specifically covered “claims for violation of any federal … statute … including but not limited to … the Fair Labor Standards Act” and which also waived any class actions.  The district court denied the motion, based largely on the D.R. Horton ruling.

The Eighth Circuit reversed, finding that the class waiver is enforceable and mandating the employee arbitrate (on an individual basis, I would presume).  It relied on two legal propositions in reaching that conclusion.  First, for a statute to override the FAA, it must be clear in the text or legislative history of that statute.  The Eighth Circuit found nothing in the text or history of the FLSA indicating that Congress intended that statute to be outside the purview of the FAA.  Second, the Eighth Circuit created distance from the D.R. Horton ruling.  It distinguished the facts of D.R. Horton before noting that “even if D.R. Horton addressed the more limited type of class waiver present here, we still would owe no deference to its reasoning.” It cited six federal district courts that had reached similar decisions (by my count there are at least eight), and two that had upheld the NLRB ruling.

This seems to put employers in a bind. On one hand, the NLRB considers it a labor law violation to have employees sign arbitration agreements that waive class actions, and on the other hand, the federal courts will enforce those same arbitration agreements.  So, what does a rational employer put in its employment contracts??  It depends whether they view the risk of an NLRB penalty as greater or smaller than the reward of avoiding class actions.



The big issue in arbitration law in 2012 was class arbitration.  Many state court opinions that had found class arbitration waivers unconscionable were preempted under federal law based on application of Concepcion.  And the federal circuit courts developed a split on how to interpret Stolt-Nielsen in cases where the parties’ arbitration agreement lacks language either allowing or disallowing class arbitrations.  It is no surprise, then, that the Supreme Court (including Santa Scalia, pictured here) accepted two cases relating to class arbitration for review in early 2013.

Fallout from Concepcion

At least five states had their pro-class-arbitration decisions reversed based on application of SCOTUS’ 2011 decision in Concepcion, which held that states could not impermissibly interfere with arbitration when they define what contract clauses are unconscionable. In the past few years, the state courts in California, Washington, Pennsylvania, Missouri and New Jersey had all declared an affinity for allowing class arbitrations, even if the parties’ agreement called exclusively for individual arbitration (California had also said claims for public injunctive relief were not appropriate for arbitration).  In 2012, all that precedent was voided, with Westlaw assigning big red flags to opinions around the country.    The Eleventh Circuit even stopped the Florida Supreme Court before it could impermissibly side with class arbitration.  The rule, articulated nicely by the Third Circuit this summer in Homa, is: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

Stolt-Nielsen Split

Even if you disagree with Concepcion, you can agree that the decisions applying it are uniform.  That is not true with the decisions applying a 2010 SCOTUS arbitration opinion: Stolt-Nielsen.  In that case, SCOTUS held that arbitrators had exceeded their authority when they concluded that arbitration should proceed on a class-wide basis.  The facts were maddeningly unique, however — the parties had stipulated that their agreement was “silent” as to the availability of class actions and the panel of arbitrators had based their conclusion on public policy rationale, instead of standard gap-filling bases. Those unique facts have led courts to apply Stolt-Nielsen in at least two ways.

The popular way to interpret Stolt-Nielsen is more friendly to class arbitration.  It interprets the case’s message as a reminder to arbitrators everywhere that their job is to enforce the contract, not to be legislators.  Therefore arbitrators may authorize class arbitration as long as either the text of the arbitration agreement or other evidence shows the parties intended to allow class arbitration.   That is the approach the First, Second, and Third Circuits have taken (with opinions from the First and Third Circuits issued in 2012).  This approach is also consistent with the default rule that arbitrators interpret contracts calling for arbitration, and their interpretations are entitled to the highest level of deference.

The second way to interpret Stolt-Nielsen is as a federal presumption against class arbitration, much like the one against arbitrating arbitrability.  Courts will not assume that parties intend to arbitrate issues relating to the validity and scope of the arbitration provision itself without “clear and unmistakable” evidence of that intent (see Rent-a-Center).  Similarly, some courts (and litigants) read Stolt-Nielsen as essentially requiring clear and unmistakable evidence of the parties’ intent to allow class arbitration before an arbitrator may authorize that procedure.  In 2012 the Fifth Circuit, in particular, found that an arbitrator exceeded his authority by concluding that a common arbitration provision showed an intent to allow class arbitration.  (The provision said ““any dispute arising from [the agreement]…shall be resolved by binding arbitration.”)

SCOTUS will likely clarify its position on when class arbitrations are allowed in two cases it will hear in early 2013 (AmEx is set for argument on Feb. 27), so class arbitration is likely to be part of my year-end round up next year as well…

Even if we do not know for certain whether class arbitration will end up on Scalia’s naughty list or his nice list, we do know three courts that received big lumps of coal from SCOTUS in 2012: the West Virginia Supreme Court, Oklahoma Supreme Court, and Second Circuit.  The tone of its opinions vacating decisions of the high courts in West Virginia and Oklahoma was that of a parent washing out a child’s mouth with soap.  The Court seemed disgusted that those two lower courts would defy its authority by refusing to follow federal precedents on arbitration, to say nothing of the cheeky language those courts used to describe federal precedent.  And one has to believe that after remanding the AmEx case once already to the Second Circuit, someone at the Court is banging their head against the wall about hearing that case again.  (How could they not get the hint?!  We wanted them to reverse themselves!)

That’s the beauty of this area of the law, though.  It is changing rapidly, SCOTUS seems passionate about it, and the interplay between the FAA and state contract law is a constant tug of war about federalism and public policy.  I can’t wait to see what’s on Scalia’s naughty list in 2013!

Illustration by Jason Bryan (jason@fivepointsarthouse.com)

Just last Friday, the Supreme Court agreed to review a second circuit court case that allowed a class action to proceed, despite arguments that the arbitration clause precluded any collective actions.  The granting of these petitions is a fitting way to end a year in which there has been considerable discussion about how to apply Stolt-Nielsen, Concepcion, and other precedent in the context of claims by a group (or defined class) of plaintiffs.  Here is a preview of what is at issue, and at stake, in this arbitration double-feature.


Summary: The Third Circuit affirmed an arbitrator’s decision to allow doctors’ claims against a health plan to proceed on a class basis.  The arbitrator had analyzed the text of the broad arbitration agreement at issue, which lacked any explicit language about whether class actions were authorized, and concluded the parties intended to allow class arbitration.  The Third Circuit said this did not amount to “exceed[ing] [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The Third Circuit refused to vacate the award largely because the arbitrator made a rational attempt to interpret the parties’ arbitration agreement and that attempt is entitled to great deference by the courts.

Issue:  The Petitioner argued for review of this case based on the difference in how the circuit courts have interpreted Stolt-Nielsen (with some seeming to require explicit consent within the arbitration clause for any collective action to proceed in arbitration, but the majority noting that as long as the arbitration clause does not prohibit class arbitration, the arbitrator should use general contract interpretation principles to discern the parties’ intent regarding class actions).  It noted that “at least seven cases on this issue have reached the courts of appeals in just the last two years.”

The parties’ framing of the “question presented” reflect the different legal lenses through which the Court could view this case.  The Petitioner framed the question presented as: “Whether a contract provision requiring arbitration rather than litigation of any dispute, without more, can be a sufficient ‘contractual basis [to] support a finding that the parties agreed to authorize class-action arbitration,'” quoting from Stolt-Nielsen.  The Respondent framed the question very differently, following the Third Circuit’s lead: “Did the arbitrator exceed his powers under the [FAA] when he interpreted the atypical terms of the agreement in this case to authorize the arbitration of class claims?”

If this case were simply about the appropriate deference that courts should grant arbitrators, SCOTUS would not have granted review.  In my mind then, the relevant issue is how does SCOTUS plan to clarify its ruling in Stolt-Nielsen?  Possible options include indicating that:

  1. Stolt-Nielsen was unique, because the parties had stipulated that the arbitration provision was “silent” regarding class arbitration and the arbitrators applied their own policy judgments. The point is that arbitrators should try and determine the parties’ intent; this outcome would affirm the approach of the First, Second and Third Circuits ;
  2. Broad arbitration clauses, like the one at issue in Sutter, cannot reasonably be interpreted to authorize class arbitration; or
  3. As a matter of substantive federal law, class arbitration is precluded unless the arbitration clause explicitly allows it.

I don’t see a clear path that SCOTUS could take to reach conclusion 2 or 3, however, because contract interpretation is a matter of state law and the deference granted to an arbitrator’s decision on the merits is so great.  Of course, Justice Scalia could always surprise me. . .

Two groups already have permission to file amici — the Chamber of Commerce and DRI (“The Voice of the Defense Bar”).  They are firmly in favor of outcome 2 or 3 above.


Summary: The case is called “Amex III” because the Second Circuit has issued three opinions in the dispute, two after remand from SCOTUS to consider the impact of first Stolt-Nielsen and then Concepcion.  The Second Circuit never changed its holding — it concluded that the parties’ clause prohibiting class arbitration was unenforceable.  The Second Circuit said that antitrust claims like those of these plaintiffs are so expensive to prosecute that it would never be rational for any individual claimant to bring them, therefore denying class actions would effectively preclude the plaintiffs from vindicating their rights under antitrust laws.  The Second Circuit grounded its decision in Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 (2000), and the strong expert testimony the plaintiffs presented with respect to the viability of individual suits.  (However, the language at issue in Green Tree is a pretty thin reed upon which to rest such a significant decision.)

Issue: The petitioner in this case framed the issue as: “Whether the [FAA] permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  The respondent has a different view of the issue: “[W]hether an arbitration clause should be enforced when there is no dispute that a litigant has shown it would be unable to effectively vindicate its federal statutory rights in the arbitral forum.”

In my view, the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent.  It could conceivably say that: 1) economic realities of litigation are never a sufficient reason to invalidate an arbitration agreement (if Congress wants to preclude arbitration, it can do that in the statutes); or 2) more narrowly, it could say that there is no federal substantive rule that arbitration can only proceed if it is economically viable, and leave any review of state-based arguments for another time.  In either case, this decision is likely to be reversed.

Four outside groups have already weighed in on this issue — the New England Legal Foundation (“protecting the free enterprise system”), Chamber of Commerce, DRI, and a group of “senior legal officers for public companies” — all of whom advocate for reversing AmexIII.  The amici worry about an exception that could swallow the rule, and present the situation in the most dire of terms — DRI, for example, argues that AmexIII affects the enforceability of millions of arbitration agreements and “substantially undermines” the federal right to enforce arbitration agreements.

No matter how SCOTUS decides Sutter, corporations are likely to continue drafting arbitration agreements that explicitly exclude class arbitrations.  If those are strictly enforced (without any state law exceptions, see Concepcion), then we must acknowledge that our justice system is writing off a significant amount of smaller cases that cannot effectively be arbitrated on an individual basis, like those at issue in Amex III.  Some of those cases may even have significant public value.  Yet we are not likely to see amici briefs in favor of making sure claims with small dollar values have a cost-effective way of being arbitrated.

In contrast to recent decisions from other circuit courts, the Fourth Circuit found a defendant did not waive its right to arbitrate, despite litigating for more than 6 months and conducting discovery.  Rota-McLarty v. Santander Consumer USA, Inc., __ F.3d __, 2012 WL 5936033 (4th Cir. Nov. 28, 2012).

In this potential class action, the named plaintiff alleged a finance company violated Maryland consumer protection laws.  The finance company answered the complaint (asserting arbitration as an affirmative defense) and participated in discovery, including agreeing to phased discovery, taking and defending multiple depositions, and producing documents.  After six and a half months, the defendant moved to compel individual arbitration.  It explained its delay by pointing to “uncertainty” in the federal law regarding class arbitration, and saying it waited until after Stolt-Nielsen was decided and the district courts began applying it.

The district court found that the defendant’s actions waived its right to arbitrate, but the Fourth Circuit reversed.  It said the dispositive test in the Fourth Circuit is whether the opposing party has suffered actual prejudice (and noted that the reason for delay should not be considered).  It concluded that the plaintiff had not been prejudiced because six and a half months of litigation is “relatively short” and because the mere fact of participating in discovery does not equate to prejudice.

Recent cases shows significant difference among the federal circuit courts in how they are evaluating claims that a party waived its right to arbitrate.  For example:

  • In the Fourth Circuit, 6.5 months and significant discovery is not enough to waive the right to arbitrate.  In the Third Circuit, however, 10 months and no discovery is enough to waive the right to arbitrate, if a dispositive motion was filed.
  • In the Eleventh Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction waives its right to arbitrate.  While in the Fourth Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction does not waive its right to arbitrate.

Because there is so much flux in the law, defendants who want to retain their right to arbitrate should err on the side of caution and make their motion to compel early.

After an arbitration about-face by the defendant in a class action, the Eleventh Circuit ruled that the defendant had waived its right to compel arbitration by: participating in litigation for two years and affirmatively declining to enforce its arbitration agreement with the plaintiffs until after SCOTUS issued its Concepcion decision.  Garcia v. Wachovia Corp., ___ F.3d. ___, 2012 WL 5272942 (11th Cir. Oct. 26, 2012).

The class of plaintiffs in Garcia claimed that banks unlawfully charged them overdraft fees.  One of the banks, Wells Fargo, had arbitration clauses in its customer agreements, and the clauses precluded class arbitration.  Despite that, it did not move to compel arbitration by the motion deadline in the scheduling order.  Even when the district court specifically offered Wells Fargo the opportunity to move to compel arbitration at a later date, Wells Fargo told the court that it did not intend to seek arbitration of the plaintiffs’ claims.

However, after the Concepcion decision, Wells Fargo changed its strategic course and filed a motion to dismiss the class action in favor of arbitration.  To explain its two year delay, Wells Fargo argued that the various state laws governing the agreements had declared class actions waivers unenforceable, so Wells Fargo had concluded that moving to compel arbitration would have been futile.  The plaintiffs, of course, argued that Wells Fargo had waived its right to arbitration.

The Eleventh Circuit recognized that there is a futility exception of sorts — litigants are not required “to engage in futile gestures” — but concluded Wells Fargo’s behavior was not excused.  The only time that a party’s failure to compel arbitration will not amount to waiver, after it has “substantially invoked the litigation machinery,” is when it “would almost certainly have been futile.”  Wells Fargo did not meet that high burden here, because the Eleventh Circuit concluded that Concepcion did not change the law on preemption, it merely applied it in a new context.  The court noted that “absent controlling Supreme Court or circuit precedent foreclosing a right to arbitrate, a motion to compel arbitration will almost never be futile.”   For that reason, the court affirmed the district court’s denial of Wells Fargo’s motion to dismiss the action in favor of arbitration.

This decision reminds me of advice from my contracts professor in law school.  When we began to ask her a series of follow-up questions about her modified Socratic method  (where there was some rhyme and reason to who got asked questions when) that were clearly intended to identify on which days we could be unprepared, she cut off the questions curtly with “Don’t try to game it.  Just be ready.”  The same applies to attorneys representing parties with arbitration agreements.  If there is a chance in hell that your arbitration agreement can be enforced (and that you strategically will want that to happen), make that argument early and often.